The Cyclically Adjusted Deficit

The CBO has released an interesting document measuring the “cyclically adjusted deficit,” that is, the deficit once we net out economic factors (namely the recession).
The adjusted deficit number is an attempt to answer the question “what would the deficit be if there were no recession?” What the numbers show is that the recession is not the sole cause of the current budget deficit.
“By those measures, roughly one-third of the projected decline in the total surplus between 2000 and 2003 results from “automatic stabilizers” the automatic response of the budget to the business cycle. Most of the remaining two-thirds is attributable to legislative action: primarily EGTRRA [2001 tax cuts], JCWAA, and increases in discretionary spending (including emergency appropriations enacted in response to the terrorist attacks of September 11).” See below for more discussion.

Congressional Budget Office – CBO FTP for ‘The Standardized and Cyclically Adjusted Budgets: Updated Estimates’
In August 2002, the Congressional Budget Office (CBO) released its updated baseline projections of federal revenues, outlays, surpluses, and deficits for the next 10 years.1 Those projections show that the federal budget has gone from a surplus of $236 billion in 2000 to a deficit of about $157 billion in 2002 and that, if current policies continue, it is likely to show a deficit of $145 billion in 2003. The size of the budget surplus or deficit reflects temporary factors, such as the effects of the business cycle or of one-time shifts in the timing of federal spending and tax receipts, as well as the longer lasting impact of legislation, such as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Job Creation and Worker Assistance Act of 2002 (JCWAA). To help separate out those factors, this report presents updated estimates of two adjusted budget measures. Those measures are the cyclically adjusted surplus or deficit (which filters out the effects of the business cycle) and the standardized-budget surplus or deficit (which removes the effects of the business cycle and other factors).
By those measures, roughly one-third of the projected decline in the total surplus between 2000 and 2003 results from “automatic stabilizers” the automatic response of the budget to the business cycle. Most of the remaining two-thirds is attributable to legislative action: primarily EGTRRA, JCWAA, and increases in discretionary spending (including emergency appropriations enacted in response to the terrorist attacks of September 11). The largest increase in the deficit during that period occurs in 2002. Legislation accounts for roughly half of that increase, and automatic stabilizers for about one-quarter. The rest results from a variety of factors, including unusually large tax refunds this year (stemming from overpayment of estimated and withheld taxes in 2001) and, most likely, weakness in tax payments on capital gains realizations.
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Surplus or Deficit (-)
in Billions of Dollars Actual Projected
1998 1999 2000 2001 2002 2003
Total Budget Surplus 69 126 236 127 -157 -145
Less: Cyclical Surplus (Automatic stabilizers) 44 67 96 20 -40 -28
Equals: Cyclically Adjusted Surplus 25 58 140 107 -117 -117
Less: Other Factorsa 60 59 40 39 65 28
Equals: Standardized-Budget Surplus -35 -1 101 68 -182 -145
Effects of Legislation Enacted Since January 2001
(Minus timing shifts)b n.a. n.a. n.a. -52 -183 -239
EGTRRA n.a. n.a. n.a. -37 -71 -91
JCWAA n.a. n.a. n.a. n.a. -51 -43
Defense n.a. n.a. n.a. -1 -38 -45
Other legislation n.a. n.a. n.a. -14 -23 -61
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Calculations of cyclically adjusted budget measures attempt to remove the effects of the business cycle on revenues and outlays (that is, the automatic stabilizers that are measured by the cyclical part of the budget). For example, cyclically adjusted revenues exclude the revenue loss that automatically occurs during recessions.